All you need to know about bankruptcy

Do you know that bankruptcy will remain on your credit report for 10 years? Is bankruptcy an option for your small business? Check out this guide to learn everything you need to know about filing for bankruptcy.

In times of recession, bankruptcy becomes more and more popular. But, before you file for it, you should learn what it implies. Take a look at this guide and learn everything you need to know before filing for bankruptcy.

Bankruptcy 1.0.1

Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by court order, often initiated by the debtor.

If the court decides that you can declare bankruptcy, it will also decide what debt is dismissed and may still require you to pay back some of your debt.

Declaring bankruptcy will negatively impact your credit history and make getting loans and new credit cards difficult. You may not qualify or be required to accept a higher rate.

When is bankruptcy a good idea?

Bankruptcy will not only relieve you of certain debt, but the court will usually assign you a budget, so you can repay your remaining debt. It will stop foreclosures of homes, repossessions of cars and other property, cease wage garnishments and prevent your utilities from being turned off.

Even though every case is different, bankruptcy can reduce or dismiss common debt from credit cards, medical bills, past-due utility bills and even rent. Other debts, such as child support and alimony, student loans and owed taxes are never, or rarely, dismissed by bankruptcy,

What are the types of bankruptcy?

In fact, there are six different types of bankruptcies:

•Chapter 7: Liquidation.

•Chapter 13: Repayment Plan.

•Chapter 11: Large Reorganization.

•Chapter 12: Family Farmers.

•Chapter 15: Used in Foreign Cases.

•Chapter 9: Municipalities.

While businesses usually file Chapter 11, for individuals, the most common types of bankruptcy are Chapter 7 and Chapter 13. Each has its advantages, and your personal situation will define which may be the best for you.

In Chapter 7, the court sells your property and assets to pay back your debt. Any debt left over will be dismissed. Some property is excluded, but you could lose your car and home. This bankruptcy will stay on your credit report for 10 years.

In Chapter 13, you will work with the court to repay a part or all of your debts. In this bankruptcy, you can retain your possessions and assets and not have them sold or repossessed. Repayment plans can last from three to five years and the bankruptcy will be on your credit history for only seven years.

Improving your credit after bankruptcy

One of the biggest consequences of declaring bankruptcy is the impact on your credit. Not only will the filing impact your credit, but any loans or credit card debt settled by the bankruptcy will also be negative items on your credit report. After bankruptcy, you may not be eligible for new loans and credit for years after you file.

While you can't stop the negative impact of bankruptcy on your credit, there are things you can do to improve it over time.

Try to avoid adding any new negative items to your credit report by sticking to a budget, paying all your bills on time and avoiding building new debt.

Here are four ways to improve the financial profile that will help you get credit and work on restoring your score: secured loan, secured credit card, co-signed credit card or loan and authorized user status

You’re already seeking redemption, so you can’t put yourself in a position where you’re begging for forgiveness for late payment or struggling to keep up with mounting credit balances, so be vigilant about paying on time.

When your recent history finally shows you are a good credit risk, your vigilance in restoring your credit reputation will pay off.

Is bankruptcy your best option?

Your credit score will take a hit after bankruptcy, but it won't hurt your credit score forever. Eventually, the bankruptcy will fall off your credit report and will have no future impact on your score. Here's how long it takes for that to happen.

How long does bankruptcy stay on your credit report?

Bankruptcy typically stays on your credit report for a minimum of seven years and a maximum of 10 years.

While there are many types of bankruptcy, two of the most common types are Chapter 7 and Chapter 13. A Chapter 7 bankruptcy can stay on your credit report for up to 10 years and all eligible debts are discharged immediately. A Chapter 13 bankruptcy can stay on your credit report for up to seven years and you agree to a three- to five-year repayment plan to partially or fully repay your debts.

Each delinquent account included in the bankruptcy will also remain on your credit report for up to seven years. But the seven-year clock for delinquent accounts begins when they were first reported as late, not when you filed for bankruptcy.

So if some of the accounts included in your bankruptcy were already delinquent before you filed, they will fall off your credit report before the bankruptcy does. Any accounts that were current until you filed, however, will be removed from your report at the same time as the bankruptcy.

Is bankruptcy your best option?

Bankruptcy is just one of the various debt relief options. Depending on your situation, there may be other alternatives you may want to explore first, like taking out a debt consolidation loan or trying to work out a repayment plan with your creditor on your own or with the help of a credit counselor.

In some cases, you may find that a different debt relief strategy would save you money while also having less of a negative impact on your credit score, but if you do decide to file for bankruptcy remember that the damage to your credit score will be temporary.

Bankruptcy & small businesses

Bankruptcy happens when a business can no longer pay its debts or doesn’t have enough assets to cover its liabilities. As cash flow and market demand can shift dramatically in a short period of time, small businesses are usually the ones that struggle the most during these difficult times.

And even if talking about bankruptcy is something no one wants to do, it is necessary to understand how it happens and what to do.

For businesses, there are typically two types of bankruptcies:

  1. Liquidation

In this case, the business owner turns everything over to a bankruptcy trustee and walks away. The trustee will liquidate the assets and pay its creditors.

  1. Reorganization

In this case, the owner runs the company and gets the job done. There might be times in which a court-appointed trustee takes place, but this happens only if the owner or manager is suspected of being dishonest or not doing a good job. During the reorganization, the debtor will define a new business plan and seek approval from creditors.

Filing for bankruptcy is usually considered a failure, but it doesn’t have to be that way. Before you get to that point, there are certain red flags that, if detected on time, will mitigate the disaster. Follow these steps:

Recognize the signs

Warning signs are usually on the records. Check your cash flow reports, as financial statements are the key to reading your business and detecting problems at an early stage. These statements will help you see where the money is coming from and where the money is going. If you can see this early enough, you might be able to make the necessary adjustments and correct the problem.

Detect the root of the problem

You need to take the time to seriously determine what is causing the problem and whether it is something you can control or not. Avoid personal liability issues at this stage. Failing to make payments will only make things worse because not only will you still have to deal with it later, but also you will have to pay penalties.

Contact your lawyer

Find an attorney with expertise in bankruptcy and turnaround strategies. Ideally, it should be someone with experience in your own industry.

As soon as you start noticing warning signs, it is a good idea to get professional help before things get really bad. Preparing yourself for a potential bankruptcy when things go bad doesn't mean you need to file for one.

Actually, filing is not the solution as it is usually expensive, time-consuming and complicated, let alone the emotional weight it carries as well.

Even in these situations, you can still plan for success. Approach your creditors with a tailored financial plan that gives you credibility. If your business is failing for the first time, most banks appreciate you coming to them early enough to let them know what the situation is and how you plan to deal with it.

Bankruptcy doesn't happen overnight. It is a long process with different stages and in many of them, you can still manage to save the ship.  And even if there is no way of doing it, you need to acknowledge the situation and plan for a wind-down bankruptcy, as challenging as it seems.

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